With the 2017 tax season having just come to a close in the U.S. experts say non-payment on cryptocurrency income is widespread and correctly filing a return on virtual coins remains difficult.
“It’s a nightmare for most people,” Bill Brock, a Chicago-based accountant who specializes in cryptocurrencies, told Insider.Pro.
According to Brock some cryptocurrency tax calculations can be straightforward but most are not, with poor recordkeeping often to blame. In many cases traders are unable to prove how much their virtual money holding was worth when they acquired it, meaning calculating any gain or loss made on the investment is a tough task. Things become more intricate if a trader has bought and sold across different exchanges using a variety of cryptocurrencies.
“Sometimes the records are such a mess I despair of getting anything right,” Brock said.
Potential solutions to this problem of complexity have come in the form of software, with several applications appearing in recent years catering specifically to the cryptocurrency market. Used first mostly by early cryptocurrency traders, their audience has expanded to include more general investors. “We’ve seen a transition in our customer base,” explained Perry Woodin, the founder at blockchain service provider Node40, which includes a tax calculator among it suite of tools. “It’s gone from the tech savvy people who had everything in their own wallet to people who just wanted to get it on the market.”
But regardless of the growing availability of software to ease the process, non-reporting of income earned through cryptocurrency remains a common practice.
“It’s still really prevalent,” Woodin told Insider.Pro. “We tell people about our product and a lot of people will say, ‘I’m not going to pay my taxes until there’s more pressure from the IRS’. They just think they can get away with it now and deal with it later.”
The Node40 founder believes that many cryptocurrency investors are willing to live with the risks associated with not declaring income based on the calculation that unless they are converting their gains into U.S. dollars and making big payments into their bank accounts, they are unlikely to be investigated by the Internal Revenue Service (IRS).
For other traders, the route to evading tax is not through non-reporting but rather through sending cryptocurrencies overseas. Although the U.S. does officially require citizens to pay tax on their worldwide income, once a cryptocurrency is held in an exchange beyond America’s borders, it becomes much more difficult for the authorities to track.
“This drives U.S. regulators crazy,” said Brock. “Though traders might send some cryptocurrency back through [U.S.-based exchange] Coinbase to keep up appearances, they’re parking the rest in the equivalent of a Swiss bank account.”
Brock argues that at some point in the future the IRS would do well to announce an amnesty whereby anyone with undeclared cryptocurrency income stashed overseas is granted immunity from criminal prosecution provided they come forward to pay the fines and back taxes that they owe. Not only could this flush out evaders, it would also offer a solution to traders who want to abide by the law, but have found it difficult to do so because of a lack of clarity on the rules from the IRS.
“I have people who are fully complying with the law who are scared because IRS guidance on this has been absolutely terrible,” the accountant explained.
In spite of the challenges present today when it comes to filing tax returns on cryptocurrency earnings, industry figures believe it only a matter of time before the process gets easier.
Simplification will come through software which, as it grows more sophisticated, will also become more deeply integrated with cryptocurrency exchanges, meaning the collection of the data needed to calculate tax liabilities will be automated.
At the same time, tax evasion on cryptocurrency will become ever more difficult, especially as bitcoin and other virtual currencies become increasingly mainstream, to the point that they are being used in the everyday economy to pay for goods and services.
Woodin believes that could come in as little as 12 to 18 months’ time.
“The forces at work right now are the people who see cryptocurrency as a way to save money, that’s really what’s going to increase adoption,” he said.
“If you can find cheaper ways to move value around, merchants are going to want that. The next step is that it just needs to be easy enough and seamless enough for consumers to use. We’re not there yet.”
For now, American cryptocurrency investors looking to minimize their tax burden legally have the option of moving to Puerto Rico. The Caribbean island does not levy federal personal income taxes or capital gains tax and residents can still keep their American citizenship.
That route does not come without complications and caveats of its own, although Brock says for certain groups of people looking to protect their cryptocurrency fortunes, it might be a viable option.
What the accountant stresses above all, however, is that when it comes to the world of cryptocurrency trading, there are still many areas where the rules are not clear. The last guidance issued by the IRS on the subject appeared in 2014, when it said that for tax purposes cryptocurrencies should be treated like property.
Most agree that updated guidelines are now sorely needed. Until those appear, every trader – and their accountant – will need to take some risks.
“Even though I might be taking a position which I think is correct, I’ve told my clients that I have no assurance that the IRS will agree with me,” said Brock.
“I know where the landmines are but I have a lot to learn, just like everyone else in this field.”
By Rahim Rahemtulla